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The possible merger of EADS, the parent company of European aerospace giant Airbus, and BAE systems, one of the world’s biggest defence contractors would create the world’s largest aerospace and defence group. Their combined sales were $96 billion last year, compared to Boeing’s $76 billion.
Even beyond the sheer size, this isn’t your average merger.
National security issues
From last night’s statement on the potential merger:
BAE Systems and EADS operate highly secure and sensitive defence businesses in the USA, the UK, France, Germany, Spain, Saudi Arabia and Australia, amongst other countries.
The merger will require national security clearance from the United States for certain contracts.
Some thought has already gone into this, the companies suggested that they could legally separate some sensitive defence contracts.
US defence issues are always politically fraught, and given that this new company would be a powerful competitor for Boeing and other contractors, there could be pressure against the deal.
EADS was originally created from four European companies from several different countries. A combination of major French and German shareholders, including the French government, own 44.7 per cent of the company. Spain also owns 5.45 per cent stake.
These groups have been known to involve themselves in politically sensitive business decisions, leading to occasional tension with the company’s leadership.
The deal with BAE involves the British government as well, and any deal will have to satisfy a variety of national interests.
The deal’s structure:
According to Steven Davidoff at Dealbook, the companies will not combine in a traditional sense, but will rather enter into a dual listing arrangement.
They will maintain the same share price, run as one company, and share profits and losses. However, they will stay on their current stock exchanges.
The two companies will have to convince their shareholders that the cost savings and market power afforded by the deal make this regulatory nightmare worthwhile.
Their motivation is self evident, they already collaborate on a variety of projects, EADS wants to gain more access to the American market, and the up-down nature of the defence and aeroplane markets mean a combined company will be more stable.
They have until October 10th to announce a transaction, but these negotiations will probably require quite an extension.
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